December 1, 2020  
 
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Sarbanes-Oxley for Entrepreneurs

 

The Sarbanes-Oxley Act: Title V

Written by Bennet Grill for Gaebler Ventures

Financial and industry analysts played a large role in the financial scandals that brought down the economy. This article focuses on the Title V of the Sarbanes-Oxley Act, a section that specifically addresses Analyst Conflicts of Interest with the aim of keeping securities analysts on the straight and narrow.

The fifth title of the Sarbanes-Oxley Act reviews the possible conflicts of interest that may face securities analysts when they interact with publicly traded companies.
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This section contains rules specifically designated to "foster greater public confidence in securities research, and to protect the objectivity and independence of securities analysts.

The first statue set forth bans the preapproval of investment research of securities analysts by anyone employed or directly working with the broker of securities or analysts in the investment banking division. This rule effectively builds a wall dividing the different divisions of the sell side business of a bank.

With this rule in place, securities analysts will not be pressured by brokers who are selling the security or investment bankers who may be in a transaction with a related company. Such an influence would make research reports highly biased and inaccurate— the quality rating of the security would be affected if other divisions of the bank were involved in business transactions related to that security.

The next rule set forth in this section prohibits those in the investment banking division from performing the compensation evaluation of securities analysts. This reinforces the notion that the analysis of securities should remain separate from those buying and selling securities. Bonuses could become a form of censorship if investment bankers were allowed to determine the compensation of securities analysts—analysts providing favorable reviews of the "right" securities would be highly rewarded while analysts who provided objective reviews would be marginalized because they did not cooperate.

Finally, this section of Title V specifically prohibits brokers or investment bankers from retaliating or threatening to retaliate against securities analysts as a result of an unfavorable research report which could negatively affect the business of the broker or investment banker.

Title V then sets forth some rules regarding the limitation of the activities of securities analysts. During the time period leading up to the initial public offering of a stock, securities analysts working for the firm performing the IPO are prohibited from publishing or distributing research reports relating to the security or the issuer of the security.

This is to prevent analysts from influencing the performance of an initial public offering to boost the profits of the investment banking division of their firm. This section concludes with a general provision which established "appropriate informational partitions" between investment bankers and securities analysts. It is mandated that the all securities analysts at broker and dealer firms disclose all possible conflicts of interest in each applicable research report.

To ensure accurate and fair analysis of securities, it is important to separate the division concerned with the analysis of securities and the investment banking division of each broker and dealer firm.

The Sarbanes-Oxley Series -- Learn More About Sarbox

The Sarbanes-Oxley Act: An Introduction
The Sarbanes-Oxley Act: Title I
The Sarbanes-Oxley Act: Title II
The Sarbanes-Oxley Act: Title III—Audit Committees
The Sarbanes-Oxley Act: Title III—Blackout Periods
The Sarbanes-Oxley Act: Title IV
The Sarbanes-Oxley Act: Title V
The Sarbanes-Oxley Act: Title VI
The Sarbanes-Oxley Act: Title VII—Accounting Firms
The Sarbanes-Oxley Act: Title VII— Past Violators
The Sarbanes-Oxley Act: Title VIII
The Sarbanes-Oxley Act: Title IX-XI

Bennet Grill is a writer who has a passion for business and finance. He is currently an Economics major at Duke University in North Carolina.

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